The “Unintended” Consequences of “Cash for Clunkers”

News reports suggest that the Obama administration’s “Cash for Clunkers” program has been an unalloyed success. Eligible for a rebate of up to $4,500 if they trade in their old (but not too old) gas-guzzlers, it is not surprising that the owners of qualifying vehicles have rushed to their local auto dealers to claim the subsidy.

Automobile manufacturers apparently are hard-pressed to fill the resulting increase in demand for newer, more fuel-efficient cars, which exhausted by the end of the program’s first week the $1 billion in taxpayer money appropriated initially to fund it. Congress now is on the verge of authorizing another $2 billion in public financing.

Let’s look at the consequences, which mimic eerily the causes and consequences of the subprime mortgage crisis: Car owners are being paid to trade in vehicles they already have paid for (or on which they can at present afford their remaining monthly loan balances) for taking on new debt that results in very modest improvements in fuel efficiency.

Gullible buyers who take advantage of the “cash for clunkers” program will see their insurance premiums rise and, in many states, also will be faced with higher fees for registering their new cars, buying license plates for them, or both. Depending on the time horizon over which they plan to own their new vehicles, those additional costs may well offset the $3,500 or $4,500 taxpayer-financed “rebate” to which they are entitled. And “cash for clunkers” predictably will reduce the supply of used cars (and also that of the parts for repairing them), thus raising their prices and harming anyone who is not fixated on fuel efficiency but rationally makes purchase decisions based on the overall cost per mile driven of “new” versus “old” transportation options.

“A sucker is born every minute”, as P. T. Barnum once said.

But economists, who, like me, are very useful people, see a silver lining in every black cloud: Within the coming year, many low-mileage previously owned (aka “used”) cars will be on the market at clearance prices because their owners realize that they cannot afford them. Wait to buy. You can then exploit the Obama administration’s failure to comprehend the lessons taught in Economics 101.

William F. Shughart II is a Senior Fellow at the Independent Institute, the J. Fish Smith Professor in Public Choice at Utah State University, past President of the Southern Economic Association, and editor of the Independent book, Taxing Choice.
Posts by William F. Shughart II | Full Biography and Publications
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